Global Economics

British Retail Could Face a Fire Sale

That's because Iceland's Baugur group, which has investments in 1 in 10 British retailers, filed yesterday for protection from creditors

A large section of the British high street was in effect put up for sale yesterday as the Icelandic retail group Baugur filed for protection from its creditors.

The company, which has investments in about one in 10 high street retailers, including Hamleys toys, House of Fraser department stores and Iceland frozen food supermarkets, was forced to seek the Icelandic equivalent of bankruptcy protection after the troubled Landsbanki bank withdrew its funding and walked away from refinancing talks.

The move raises questions about the future of British stores backed by Baugur, such as the jewellery specialist Goldsmiths and the fashion chain Jane Norman, at a time when high street trade is dire, a vast number of shops are already empty and new financing is notoriously difficult to raise. The retail tycoon Sir Philip Green, and several private equity funds which have been circling Baugur's assets since October, are waiting in the wings to snap up some of the UK's most high-profile chains at a knockdown price, given that a number of controlling stakes are in effect now in the hands of administrators.

Sources say the most likely scenario in the short-term is that Baugur's shareholding in the high street chains will pass to its banks, but yesterday will be seen as the first official day of the great Baugur sale.

Sir Philip, who went to Iceland in October to discuss buying about £1bn of Baugur's debt, could pounce on some of Britain's biggest fashion chains. He said yesterday: "If someone offers us something, we'll look at it."

The billionaire said he was not interested in working with third parties to potentially buy any of the Baugur-backed brands. He explained: "We don't need any other parties. If we see something we like, we will buy it with our own chequebook. We have plenty of financing and do not need anyone's help."

He added: "We are looking at all sorts of things on a daily basis outside of Baugur."

Sir Philip declined to comment on any Baugur-backed retailers, but he is understood to have expressed interest in Principles, which is part of the Mosaic Fashions group. Baugur owns 49 per cent of Mosaic, which also operates the Karen Millen, Coast, Oasis and Warehouse chains.

Robert Clark, the senior partner at Retail Knowledge Bank, said: "I think [Sir Philip] would be interested in Mosaic collectively and all Baugur's fashion chains, such as All Saints and Jane Norman. I am sure he is rubbing his hands in delight."

Meanwhile, directors of some of Baugur's British retailers mounted a rearguard action against speculation that administrators might be forced to hold a fire sale of some chains, after private equity investors, including TPG and Alchemy Partners, expressed interest in buying some of Baugur's debt last autumn. They also insisted that the Icelandic company's filing for creditor protection would not affect their operations.

Derek Lovelock, the chief executive of Mosaic Fashions, said: "We have strong brands, the teams are focused on trading and our job is to secure the long-term future of Mosaic by working with [our main bank] Kaupthing. The board of Mosaic Fashions wishes to make it clear that the news of Baugur filing for a moratorium will in no way affect the future strength of the group or the operations of the business."

Baugur's holding in Mosaic is understood to be part of the credit protection programme it filed for in Iceland yesterday. Nick Bubb, a retail analyst at Pali International, said he believed Mosaic would be broken up, adding: "It is a fashion retailer in a tough sector. It had problems with working capital and stock before Christmas."

Overall, he believes that Mosaic's chains will ultimately be owned by private equity funds, other retailers or Sir Philip Green.

Don McCarthy, the chairman of House of Fraser, said: "We can only continue to emphasise that the difficulties that Baugur faces do not affect House of Fraser's trading or banking position. It is business as usual."

Baugur's problems came to a head on Tuesday night, when Landsbanki walked away from talks about refinancing the investment group, leaving Baugur with little option but to file for creditor protection in Iceland. In a separate filing yesterday, Landsbanki applied for Baugur's UK arm, BG Holdings, to be placed into administration with PricewaterhouseCoopers in Britain.

BG Holdings comprises a variety of stakes in the companies behind Iceland, House of Fraser, Hamleys and the jewellery chains Goldsmiths, Mappin & Webb and Watches of Switzerland, which are part of the Aurum Group. Sources said the creditor protection programme in the UK was likely to have the right of ownership of Baugur's stakes in British retailers.

Nick Hood, a partner at the restructuring specialist Begbies Traynor, said: "This could potentially be good news for Baugur's retail investments, which have been grappling with the uncertainty of having a significant but unstable shareholder, if more solid investors such as private equity houses are willing and able to pick up its stakes.

"However, in an environment where retailers face the triple pressures of the impact on margins from heavy discounting, the increased cost of stock due to sterling's weakness, and the challenge of persuading landlords to bring rents back to more realistic levels, the big question is whether buyers can be found for all of Baugur's fashion and retail investments which number 12 in the UK alone." Bryan Roberts, the global research director of Planet Retail, stressed that the potential demise of Baugur did not necessarily mean that its retail chains would be sold or stores would be forced to close. "At the moment there is no need to talk of store closures," said Mr Roberts. However, if Sir Philip or another retailer bought some of Baugur's chains, they might then close stores to avoid duplication of shops. Mr Roberts added: "Baugur is clearly not going to exist in its current form for much longer."